McCormick Stock Looks Tasty Right Now

McCormick (NYSE: MKC) investors have some big questions ahead of its earnings report in a few days. Consumer shopping behaviors are shifting due to inflation even as people prioritize experiences like dining out.

These factors might convince management to reduce their 2022 outlook as part of McCormick’s operating update, set for the morning of Wednesday, June 29. Let’s take a closer look at that outlook, and at the spices and flavorings specialists’ broader potential for market-beating investor returns.

Sales trends still point up

McCormick’s business hero up through wild swings in consumer demand over the last year. People recently tired of cooking at home because of pandemic-related social distancing, and that move pressured sales for many of its sauces, herbs, and flavorings.

But McCormick is still seeing elevated demand for at-home cooking supplies compared to the pre-pandemic days. And its enterprise segment, which caters to cafeterias and restaurants, enjoyed a solid rebound in Q1. As a result, sales grew 4% last quarter, even following a 20% surge a year earlier.

The main question heading into Wednesday’s announcement is whether that positive momentum continued deeper into 2022. Most investors are looking for McCormick’s sales to rise to $1.61 billion in Q2, or up 6% year over year. Watch the balance between the restaurant division, which grew 14% last quarter, and the consumer division, which shrank 2%, for signs of more broad-based gains.

Profit margins are being pressured

McCormick is facing a tough profitability challenge, too. Costs are soaring on inputs and transportation, putting pressure on its global supply chain. Inventory flow is a big risk today due to manufacturing bottlenecks and shifting demand preferences. McCormick might have to cut prices on some products if it finds itself overstocked. Conversely, it could lose sales by failing to get the right products to its retailing partners in time.

MKC Gross Profit Margin data by YCharts

The main metrics to watch on this note are profit margins. Gross margin fell 3 percentage points last quarter, to 37% of sales. CEO Lawrence Kurzius said back in late March that McCormick would eventually offset all the extra costs that have hit the business through a mix of increased prices and slashed expenses. A stabilizing gross profit margin is the first sign that these initiatives are working.

Looking to 2023

McCormick might also adjust its remaining 2022 outlook, which currently calls for sales to grow by about 5% after adjustment for currency exchange swings. Profitability is also forecast to rise as adjusted earnings expand by between 8% and 10%.

Those forecasts represent solid sales growth and impressive financial returns, especially considering that the business expanded significantly in fiscal 2021. Yet the fear heading into this week’s report is that McCormick will have to lower expectations for the rest of this year. Since its last update in late March, inflation has accelerated, and economic growth has slowed in key markets like the US and Europe.

There’s nothing novel about an economic pullback, especially following several years of usually fast consumer demand spikes. McCormick has thrived through many recessions, after all, and has still managed to raise its dividend in each of the last 36 years.

Another downturn likely wouldn’t end that streak in 2023. But it would contribute to volatile stock price returns over the short term.

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Demitri Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends McCormick. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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